Montenegrins may have been surprised late last year to learn that the global financial crisis had arrived in their tiny Balkan country. Newspapers, the Internet, and even a James Bond film painted Montenegro as the Monte Carlo of Eastern Europe. The nation’s mountainous, tree-lined coast, medieval walled cities, and stone ruins set the scene for a boom in luxury hotels and private villas.

Global Montenegro, a tourism firm co-founded by Milo Đukanović, owns land in Budva, one of the country’s rapidly developing coastal towns.

Credit: Bratislav Tabaš

In December, the administration of Prime Minister Milo Đukanović announced that Montenegro would bail out First Bank (Prva banka), one of the country’s largest financial institutions and a major investor in the Montenegrin boom. First Bank is majority owned by Đukanović, two siblings, and a close friend.

Members of local watchdog groups, opposition parties, and journalists say this is just another example of the government’s interests aligning with the financial interests of the first family. They say their small country — fewer than 700,000 people in less space than the U.S. state of Connecticut — seems at times like the private corporation of the prime minister and his family. With Đukanović’s political party handily winning elections at the end of March, the prime minister is expected to remain in power for another two years.

“Montenegro is a lawless country,” charges Milka Tadić, editor of the country’s influential Monitor magazine. “And if you are part of the government or close to its circles you can do whatever you want.”

Đukanović has amassed a level of wealth that is hard to explain given his meager government salary over the years. Some believe his wealth stems from his days in the tobacco smuggling business. Italian prosecutors place the prime minister at the center of a conspiracy by Montenegrin officials and the Italian Mafia that allegedly smuggled huge quantities of cigarettes for about 10 years starting in the 1990s, although prosecutors did not specifically allege that Đukanović profited personally from smuggling.

Allegations of corruption are attracting interest outside Montenegro these days, as the country is making a bid to join the European Union. Although the EU is satisfied Montenegro is making progress, EU Enlargement Commissioner Olli Rehn told a Montenegrin television station in December that corruption and organized crime are the primary obstacles to the country joining the EU.

Đukanović declined to comment for this story, and has said little beyond cursory denials when various allegations of wrongdoing have surfaced over the years. Instead he has vigorously confronted his accusers in court, filing and winning defamation lawsuits against media in his homeland, Serbia, and Croatia. Last year he won a €20,000 judgment against Vijesti, the country’s largest independent newspaper, and its publisher Željko Ivanović, who was badly beaten and had suggested that Đukanović and his family were behind the attack. When the Croatian weekly Nacional published an unflattering article in 2001, Đukanović countered by suing not only that publication, but also media outlets that reprinted the story, according to Reporters Without Borders.

Family of Millionaires

In 1991, on the day he turned 29, Milo Đukanović came to power, the youngest prime minister in Europe. Shortly after, Yugoslavia split apart in war. Đukanović was one of a trio of Montenegrin leaders at the time, led by then-President Momir Bulatović, a close ally of Serbian strongman Slobodan Milošević. In 1991 and 1992, Montenegro drew international outrage for shelling Dubrovnik — a UNESCO heritage site — in neighboring Croatia. Ethnically targeted Bosnian Muslims who sought refuge in Montenegro were deported back into Bosnian Serb-held areas, a fact Montenegro has acknowledged in recent years by awarding compensation to survivors. In 1992, for example, some 80 Bosnians were sent back; some of them were kept in prison camps, but most were later executed. Opposition parties unsuccessfully called for an investigation into whether Đukanović should be tried for war crimes.

Đukanović dominated political life in Montenegro. Except for 16 months he spent in Parliament, he has served continuously since 1991 as prime minister or president. As president, he became the darling of the West when he turned his back on Milošević. After Milošević’s 2000 defeat in Serbia, Đukanović began a national push for independence from Serbia. His efforts succeeded in 2006.

During the war years, Montenegro relied on cigarette smuggling revenue to keep the country afloat. Bulatović and Đukanović have admitted that smuggling helped fill government coffers, but maintain that they never personally benefited from the trade, which they say complied with Montenegrin laws.

Whatever the source of his wealth, Milo Đukanović today is a rich man. Reporters for the International Consortium of Investigative Reporters (ICIJ) found that he owns or controls properties and company shares worth at least US$14.7 million. That stands in contrast to Đukanović’s government salary, which has never topped $1,700 per month. Đukanović’s income declaration forms, dating back to 2005, do not list earnings from other sources. His wife Lidija earns a salary slightly higher than his, according to the most recent filing.

Milo Đukanović’s brother Aleksandar, known as Aco, amassed a fortune of as much as $167 million. Credit: Vijesti

Other members of the Đukanović family also fare well financially. Đukanović’s brother Aleksandar (known as “Aco”), a concert promoter before the Balkans war, has accumulated at least $167 million, according to an ICIJ estimate of his assets. His sister Ana, a high-profile lawyer, has more than $3.5 million worth of stocks and real estate. And the prime minister’s son Blažo, a university student, earns about $15,000 monthly leasing an office that was a gift from his uncle.

“What is obvious is that Mr. Đukanović and a number of government officials amassed enormous riches during the 1990s, and now with that money they are unabashedly buying Montenegrin companies,” said Alexander Damjanović, a member of Parliament for the opposition Socialist People’s Party of Montenegro (SNP). “They are investing money in the capital markets. They are buying real estate.”

How the family accumulated its wealth is not clear. Critics say the Đukanovićs made a series of lucrative business deals, and that the prime minister has been involved in repeated conflicts of interests. The privatization of a bank in his hometown of Niksic is the prime example, they say, of how Đukanović’s family makes these business deals bear fruit.

The Niksic Bank Goes Private

In 2006, the Nikšić Bank was slated for privatization, and Đukanović was deeply involved. As prime minister he established a council to oversee the transfer of public companies into private hands, and he appointed himself president of that council. The council set up odd rules for the bank privatization by which a 30 percent stake in the bank would be sold on the Montenegrin stock exchange. The shares, held by the Republic of Montenegro and two government agencies, had to be sold to one bidder, the rules stated, and they set a minimum acceptable price, about $3 million, for the package. Only one bid came in. It was from Monte Nova, a company owned by Đukanović’s brother Aco.

Monte Nova, which already owned 12 percent of the bank, didn’t actually pay even the minimum asking price. It covered about half of its bid in cash and the rest in bonds of old foreign exchange funds, a form of payment that the council’s unusual rules for the bank deal allowed. The bonds could be bought at the time for a fraction of their face value.

After the purchase, the name was changed to First Bank and its headquarters were moved to the capital, Podgorica. Monte Nova appointed four of the seven members of the board, effectively taking control of the bank. A corporate disclosure filed with the stock exchange showed that over the next two years, the board approved a series of recapitalizations, issuing additional stock that was sold again at a minimal price of $187 per share (the market price ranged between $250 and $1500). Đukanović, through his company Capital Invest, bought nearly seven percent of the low-priced shares with a $2 million loan from the London office of Piraeus Bank of Greece. Đukanović used the stock that he was buying as collateral. Ana Kolarević, Đukanović’s sister, bought what is now a 0.5 percent share of the bank.

Aco Đukanović's shares jumped 100-fold in value and by September 2008 were worth more than $141 million. The prime minister’s investment had grown to nearly $8.7 million by then, while sister Kolarević’s shares increased to about $1.6 million. (Their current value may be different, but no shares have publicly traded since then.)

Within one year of the purchase of his first shares, Đukanović repaid the loan with stock that was worth four times what he paid for it.

Immediately after the Đukanović family invested in the bank, the amount of assets deposited there by governmental bodies skyrocketed. At the end of 2006, about the time Monte Nova took over the board, the Montenegrin government and agencies, various municipalities, and state companies had $23 million in the bank, according to bank audits. By the end of 2007, government deposits totaled $127 million. Overall deposits soared from more than $104 million in 2006 to more than $579 million in 2007, making it one of Montenegro’s most important banks overnight.

Đukanović’s government announced in December that due to the international financial crisis, the government would bail out the family’s bank. First Bank showed a profit of $5.8 million for the nine months ending September 2008, but end of the year figures just three months later revealed a loss of $35 million. Đukanović’s government helped with a loan of $64.7 million and by paying off some $19 million in loans the bank had given to state companies or companies working on state projects. By March, the bank had paid back $14.5 million of the loan.

Auditors found that while under the family's control, the bank regularly loaned to insiders and connected parties. For example, in 2007, Aco Đukanović borrowed more than $2 million and Milo Đukanović’s business partner, Vuk Rajković, borrowed $856,500. Stanko Subotić, a friend of Đukanović who is under indictment in Serbia on charges of tobacco smuggling, took out a loan from the bank to buy nearly $33 million of land on exclusive St. Nikola Island, a resort property so stunning it is known as “Hawaii.” He never repaid the loans and the bank is liquidating his properties.

Aco Đukanović and his sister Ana Kolarević declined to comment. “I would gladly talk about everything else, but not about First Bank,” said Kolarević. “I’m a small stakeholder, with a very, very small percentage. … I’m not authorized to talk about it.”

Ranka Čarapić, Montenegro’s chief state prosecutor, issued a statement in January saying that the Central Bank suspected that First Bank’s management had “taken illegal actions” that had endangered depositors’ accounts. Prosecutors and Central Bank officials refused to provide ICIJ with details about the alleged irregularities. Meanwhile, press accounts quoted depositors who complained that the bank took three weeks to honor wire requests. The case is being investigated by the Montenegrin Special Department for Combating Organized Crime.

The Network for Affirmation of the NGO Sector (MANS), a Montenegrin nonprofit watchdog group, complained to the state Commission for Determining Conflict of Interest in 2006, asking it to suspend Đukanović and several other ministers from membership in the privatization council. MANS argued that the Montenegrin Constitution prohibits government officials from performing other duties. The commission, appointed by the assembly controlled by Đukanović’s party, disagreed, finding that the board was a government body and Đukanović could serve in any governmental function he wanted.

Conflicts of Interest?

In the fall of 2006 Đukanović withdrew from the top level of government in favor of serving as a member of Parliament. Montenegro’s independence, he said, represented the achievement of his major political goal and it was time to dedicate himself to business.

Critics say the privatization of First Bank, where Đukanović, two siblings, and a close friend own shares, is a prime example of the prime minister’s conflicts of interest.

Credit: Vijesti

Over the next two years, he opened five companies. Three are still active, including Capital Invest, a consulting and management firm that owns his shares in First Bank. He co-founded and owns one-quarter interest in a firm that operates the University of Donja Gorica, a four-acre, 4,500-student private institution in Podgorica that his son Blažo attends. He also co-founded Global Montenegro, a tourism consulting and management firm, which owns acreage along the coast in the tourist town of Budva, according to Montenegrin corporate registration records.

The wealthiest members of the Đukanović family are the prime minister’s brother and sister. According to Montenegrin property records, Aco Đukanović or his firms own at least 22 business properties and four apartments, several in downtown Podgorica and, along the coast, and an acre in tourist haven Herceg Novi. Montenegrin corporate registration records show he closed Monte Nova but still co-owns two construction companies, Urbis Nova and Invest Nova, which are involved in coastal real estate development.

Aco Đukanović has a knack for making money. In 2005, he bought shares of the Montenegrin Commercial Bank for more than $1.7 million at about $636 per share, according to bank records. He sold them the next year to OTP Bank of Hungary, which bought out all shareholders for a premium of about $3,767 per share — leaving Aco a six-fold return on his investment.

Đukanović’s sister, Ana Kolarević, owns four apartments in downtown Podgorica. A former supreme court justice appointed during Đukanović’s tenure, Kolarević specializes in business law. She owns a legal firm and Edu Cons, a consulting and management company. Her 25-year-old son Edin is also an entrepreneur who owns and operates three design, consulting, and building firms.

The first family’s heavy investment in tourism and coastal development is another conflict of interest for Đukanović, say local critics, given the government’s strong backing of development. Property on the Montenegrin shoreline has risen in value dramatically over the past four years before pulling back this year, and the government has stated a desire to turn Montenegro into an upscale resort area. A large part of the growth has been due to an influx of capital from Russian businessmen, some of them clients of the prime minister’s sister.

In July 2008, Parliament, controlled by Đukanović’s party, passed a law declaring five-star hotels to be in the national interest of Montenegro. The law allows these private companies to confiscate surrounding land using eminent domain. The new law also loosens the rules for large developments and can even force small landowners to give up land to neighbors with bigger lots and houses. At the same time, Montenegro has embarked on an international, state-funded advertising campaign to lure upscale tourists to the country.

The Đukanović government has also moved to make the prime minister the president of the board of the Montenegrin Investment Promotion Agency. The position allows him to control and negotiate foreign investment deals. Đukanović has traveled extensively to Russia and last year to Dubai looking for investment along Montenegro’s coastline.

In 2006, MANS, the watchdog group, again complained about the prime minister, arguing to the Constitutional Court that Đukanović's seat on the investment board was a conflict of interest. This time MANS won, with the court ruling it unconstitutional for the prime minister to sit on the board of an independent public institution. But such matters are never that simple in Montenegro. Another body, the Đukanović-friendly Commission for Determining Conflicts of Interest, ruled that the prime minister's membership was not a conflict because he receives no pay.

Đukanović has so far ignored the constitutional court’s decision and still holds his position. In 2008 when Đukanović, prompted by the sudden illness of his successor, moved back into the top level of government, he promised to distance himself from his private enterprises. “As long as I am in a state function I don’t want to do business,” Đukanović was quoted as saying in Vijesti, the Montenegrin daily. But the prime minister has not acted quickly on that promise. Records show that Đukanović recently re-registered three of his firms, which will keep them operating through at least 2010.

Miranda Patrucić, Mirsad Brkić, and Svjetlana Čelić are reporters with the Center for Investigative Reporting of Bosnia and Herzegovina.

Tobacco Project

The Tobacco Underground is a project of the International Consortium of Investigative Journalists (ICIJ), program of the Center for Public Integrity in Washington DC. It was done in cooperation with OCCRP journalists in Bosnia and Herzegovina, Romania, Russia and Ukraine and journalists in Brazil, Belgium, Canada, China, Italy, Paraguay and the UK.ICIJ has created an interactive website with all of its stories, documents, maps and more information. It can be found here.